Philips Semi CEO expounds on merger option

LAS VEGAS  Royal Philips Electronics, which last month announced plans to spin off its semiconductor business by mid-2006, has confirmed it wishes to pursue a merger but remained quiet about potential partners it may be pursuing.

The possibility of an outmerger rather than a simple sale or an initial public offering of shares was set forth in a webcast for financial analysts on Dec. 15. During the conference Philips Electronics executives declined to comment on STMicroelectronics and Infineon as potential partners.

The name of any possible merger partner is unlikely to be disclosed before the second half of 2006. The pursuit of that unnamed partner, or partners, is moving forward in parallel with the Dutch giant’s internal efforts to sort out its chip division’s legal entanglements.

In an interview with EE Times conducted last week at the Consumer Electronics Show, Frans van Houten, chief executive officer of Philips Semiconductors, made it clear that the objective of making a separate legal structure for Philips Semiconductors is to achieve "scale."
Referring to Freescale and Infineon, semiconductor companies that were spun out of larger companies  Motorola and Siemens, respectively  van Houten made the distinction that spinning off a separate chip company and pursuing an IPO "is not the same as gaining scale."

Consolidations in the semiconductor industry are "unavoidable,” said van Houten, adding, "We’d rather take the first mover step rather than be a wallflower."

Van Houten said he is aware that in a competitive semiconductor market Philips could slip into the “second tier” unless it continues to increase in size. In fact, Philips may already be unable to afford substantial R&D investment in products that typically range from automotive and consumer electronics to mobile, telecommunications and standard products.

"The diversity of solutions required for applications in each product line is not getting smaller,” acknowledged van Houten. “Scale matters.”

According to market researcher Gartner Inc. (Stamford, Conn.), Philips Semiconductors failed to make its Top 10 list in 2005 after finishing ninth in 2004. Philips "was pushed out of the top 10 for only the fifth time in the last 25 years," said Andrew Norwood, Gartner's research vice president
(see Dec. 9, 2005, story)

Industry observers see STMicroelectronics as Philips Semiconductors’ likeliest merger partner since the Franco-Italian company shares research facilities in Crolles, France, with Philips. Van Houten, however, called the Crolles partnership "a loose alliance."

The joint efforts have been "precompetitive," he added, focused on manufacturing process technology. Philips Semiconductors needs a partner to help it “build scale in all four core areas," he added, referring to mobile/personal, home, automotive and multimarket segments.